FPTAX501A

2021

FBT and employment related payments

CHAPTERS 19,21 & 22

What is FBT

• FBT imposed on employers
• Assessed under the Fringe Benefits Tax Assessment Act 1986 (FBTAA) and the tax is imposed under the Fringe Benefits Tax Act 1986
• FBT covers a wide range of non-salary benefits provided in respect of employment
• There are 13 types of fringe benefit, all valued differently

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Liability to pay FBT

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• Year of tax runs from 1 April to 31 March
• FBT rate is currently 47%

FBT

Fringe benefits

taxable amount

for the

year of tax

FBT

rate

=

x

Assessment and payment of FBT

• Employers required to self-assess FBT
• Employers must lodge FBT returns by 21 May following the end of the year of tax, or such later date as the Commissioner allows
• Employers are generally liable to pay quarterly instalments of FBT and report these on their activity statements
• FBT instalments credited against their actual FBT liability for the year
• FBT and the cost of benefits are generally deductible to employers under s 8-1 ITAA97

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Fringe benefit

• 'Fringe benefit' arises where:
• A benefit is provided during a year of tax
• By an employer, an associate of the employer, or a third party under an arrangement with the employer or associate of the employer
• To an employee or an associate of the employee
• In respect of the employment of the employee

Exclusions

• Salary or wages
• Superannuation contributions
• Benefits under employee share schemes
• Exempt benefits, eg:
• Exempt loans
• Exempt car expense payment benefits
• Minor benefits with a taxable value under $300
• Tools and certain equipment used primarily in the employee’s employment

Categories of fringe benefit

• Car
• Debt waiver
• Loan
• Expense payment
• Housing
• Living-away-from-home allowance

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• Board
• Meal entertainment
• Tax-exempt body entertainment
• Car parking
• Property
• Residual

Calculating taxable values

• Each kind of fringe benefit has its own valuation rules
• Concessional treatment sometimes applies to 'in-house' benefits (but not where there is a 'salary sacrifice arrangement')
• Unreimbursed recipient contributions reduce the taxable value of a fringe benefit
• 'Otherwise deductible rule' reduces the taxable value of a fringe benefit
• Reduction amounts are subtracted from the taxable value of certain fringe benefits

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'Otherwise deductible' rule

• Generally, reduces the taxable value by the deduction that the employee would have otherwise received if he or she had incurred the expenditure to acquire the benefit
• Only applies to some fringe benefits:
• loan fringe benefits
• expense payment fringe benefits
• board fringe benefits
• property fringe benefits
• residual fringe benefits

Fringe benefits taxable amount

• Step 1: Calculate the taxable value of each fringe benefit
• Step 2: Divide benefits into:
• 'GST-creditable benefits' (type 1)
• 'Other benefits' (type 2)
• Step 3: Multiply:
• type 1 benefits by 2.0802
• type 2 benefits by 1.8868
• Step 4: Add the employer’s 'aggregate non-exempt amount'

General anti-avoidance rule

• The FBTAA operates subject to a general anti-avoidance rule contained in s 67 FBTAA
• Commissioner can rely on s 67 where an arrangement is entered into for the sole or dominant purpose of reducing an employer’s FBT liability
• Commissioner may cancel the tax benefit arising under the arrangement and impose penalty tax

Salary packaging

• ATO view on salary sacrifice arrangements contained in TR 2001/10, which distinguishes between:
• Effective salary sacrifice arrangements
• Ineffective salary sacrifice arrangements
• Employers need to convert the cost of providing fringe benefits into an equivalent salary amount to calculate the cost of providing a benefit instead of salary under a salary sacrifice arrangement

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Salary packaging (cont.)

• Salary sacrifice arrangements involving fringe benefits are not always beneficial to employees
• Salary sacrifice arrangements are usually most beneficial to employees where they involve the provision of:
• Exempt benefits, or
• Benefits that are taxed under concessional rules

Employment termination payments

• Employment Termination Payments (ETPs) defined in �s 82-130
• ETPs may be classified as:
• Life Benefit Termination Payments (LBTPs)
• Death Benefit Termination Payments (DBTPs)
• LBTPs and DBTPs may consist of:
• Tax-free component
• Taxable component
• ETP cap amount $205,000 for 2018/19

Taxation of ETPs (key rules)

Unused leave payments

• 'Unused annual leave payments' and 'unused long service leave payments' are generally assessable income
• Where the payments are:
• made in respect of employment before 18 August 1993 or
• in connection with a 'genuine redundancy payment', an 'early retirement scheme payment', or an 'invalidity segment of an ETP or superannuation benefit'

a tax offset applies to ensure that the rate of tax on such payments does not exceed 30%.

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Genuine redundancy & �early retirement scheme payments

• 'Genuine redundancy payments' and 'early retirement scheme payments' are non-assessable non-exempt income to the extent that such payments do not exceed the amount worked out according to the following formula:

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Base amount + (Service amount × Years of service)

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• Base amount = $10,399 (for 2018/19)
• Service amount = $5,200 (for 2018/19)

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Foreign termination payments

• A payment is non-assessable non-exempt income if:
• It is received in consequence of the taxpayer’s termination of employment in a foreign country
• It is not a superannuation benefit, pension or annuity, and
• It relates only to a period of employment when the taxpayer was not an Australian resident

Foreign termination payments (cont.)

• A payment is non-assessable non-exempt income if:
• It is received in consequence of the termination of the taxpayer’s employment in a foreign country or engagement in qualifying service on an approved project in relation to a foreign country
• It relates only to the period of that employment or engagement
• It is not a superannuation benefit, pension or annuity
• The taxpayer was an Australian resident during the period of employment or engagement

Foreign termination payments (cont.)

• The payment is not exempt from income tax under the law of the foreign country, and
• The foreign earnings were exempt from tax under �s 23AG or s 23AF ITAA36

Employee share schemes

• A company may remunerate employees by providing shares (or rights to acquire shares) in the company at a discount under an 'employee share scheme' (ESS)
• Tax treatment governed by Div 83A ITAA97
• Div 83A was originally introduced in 2009
• Div 83A was amended in 2015
• New rules apply to ESS interests acquired on or after 1 July 2015

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Overview of Div 83A

• An 'employee share scheme' (ESS) is a scheme under which 'ESS interests' in a company are provided to:
• Employees of the company (or the company’s subsidiaries), or
• 'Associates' of such employees
• An 'ESS interest' in a company is:
• A beneficial interest in a share, or
• A right to acquire a share
• To prevent duplication, Div 83A does not apply to a share acquired as a result of the exercise of a right under an ESS

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Objects of Div 83A

• To ensure that benefits (ie discounts) provided under ESSs are subject to income tax in the hands of employees rather than FBT in the hands of employers
• To increase the extent to which the interests of employees are aligned with those of their employers, by providing a tax concession to encourage lower and middle income earners to acquire shares under ESSs
• To increase the number of new entrepreneurial companies in Australia by assisting them to attract and retain employees by providing those employees with a tax concession for acquiring shares under such schemes

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Upfront or deferred taxation

• Depending on the nature of the ESS, discounts are taxed:
• On an 'upfront' basis (ie at acquisition), or
• On a 'deferred' basis (ie when a specific event occurs)
• Where upfront taxation applies, one of two concessions may be available
• Discounts are ordinarily taxed upfront unless:
• The ESS interest is at 'real risk of forfeiture', or
• The ESS interest is a share obtained under a 'salary sacrifice arrangement‘
• The ESS interest is a right that is subject to a genuine disposal restriction

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Valuation

• A key component in calculating the amount assessable to an employee under Div 83A is the 'market value' of the ESS interest (which generally takes its ordinary meaning)
• However, as it is particularly difficult to value unlisted shares and rights, the following special rules can be used:
• Income Tax Assessment (Methods for Valuing Unlisted Shares) Approval 2015 sets out special rules for valuing unlisted shares
• Div 83A Income Tax Assessment Regulations 1997 sets out special rules for valuing rights.

Interaction with CGT regime

• Division 83A is the sole regime for taxing discounts arising under an ESS
• Capital gains and capital losses arising from CGT events relating to an ESS interest are generally disregarded to the extent that they happen at or before the relevant taxing point
• Subsequent dealings in ESS interests (ie the shares or the rights to acquire shares) are subject to ordinary CGT treatment
• Subdivision 130-D ITAA97 makes certain modifications to the general CGT rules to ensure that they operate consistently with the rules in Div 83A

Associates

• An ESS interest provided to an employee’s associate is treated as if it was acquired by the employee

Reporting and TFN withholding

• A company providing ESS interests to an employee �(or associate) during an income year must give a statement containing prescribed information relating �to the scheme to:
• The employee (by 14 July), and
• The Commissioner (by 14 August)
• TFN withholding tax (at 47%) applies if the employee has not quoted their TFN or ABN by the end of the income year in which an amount is assessable under Div 83A.

Upfront taxation

• Discounts generally taxed 'upfront‘ under Subdiv 83A-B
• The discount is the market value of the ESS interest less any consideration paid by the employee (or their associate)
• Discounts attributable to employment outside Australia are foreign source income
• Employees may be entitled to reduce the amount included in their assessable income if they meet one of two sets of conditions

Reduction for employees of start up companies

• Section 83A-33(1) reduces the amount included in the assessable income of an employee under s 83A-25 by the amount that would otherwise be included under that provision
• To qualify for the reduction 3 sets of requirements must be satisfied

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First set of requirements

• First set of requirements (s 83A-33(2) to (6)):
• Unlisted and incorporation requirements
• $50 million aggregated turnover requirement
• Market value requirement
• Australian resident employer requirement

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Second and third set of requirements

• Second set of requirements (s 83A-45 further conditions):
• Employment condition
• Ordinary share condition
• Integrity condition
• Minimum holding period condition
• Shareholding and voting power condition
• Third set of requirements (s 83A-105(2)):
• Broad availability requirements

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Reduction of $1,000

• The $1,000 reduction is only available where:
• Section 83A-33 (start-up reduction) does not apply
• The sum of the taxpayer’s:
• taxable income
• reportable fringe benefits total
• reportable superannuation contributions, and
• total net investment loss

for the income year ≤$180,000, and

• Additional requirements must also be satisfied:
• Non-discriminatory scheme requirement
• No real risk of loss or forfeiture requirement

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Future treatment of ESS interests

• An ESS interest that has been subject to upfront taxation is generally taken to have been acquired for its market value (not its discounted value)
• Special rule applies to an ESS interest that is a right if the start-up concession in s 83A‑33 reduces the amount included in the employee’s assessable income

Deferred taxation

• Deferred taxation applies if one of the following key requirements met:
• Real risk of forfeiture requirement
• Salary sacrifice arrangement requirement
• Genuine disposal restriction requirement

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Deferred taxation (cont.)

• Additional criteria must also be met for deferred taxation:
• Employee must not be eligible for start-up reduction in s 83A-33
• Further conditions in s 83A-45(1), (2), (3) and (6) (ie employment, ordinary share, integrity, and shareholding and voting conditions) must be satisfied
• Broad availability condition in s 83A-105(2) must be satisfied

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ESS deferred taxing point

• Discount is assessed at the 'ESS deferred taxing point'
• ESS deferred taxing point differs for:
• Shares
• Rights to acquire shares

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ESS deferred taxing point (shares)

• ESS deferred taxing point for shares is the earliest of:
• When there is no real risk under the ESS of forfeiture or loss of the shares (other than by disposal) and any genuine restrictions preventing their disposal no longer apply
• When the employee ceases their employment, or
• 15 years after the shares were acquired

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ESS deferred taxing point (rights)

• ESS deferred taxing point for rights is the earliest of:
• When (in the case of rights that have not been exercised) there is no real risk under the ESS of forfeiture or loss of the rights (other than by disposal, exercise or lapsing) and any genuine restrictions preventing their disposal no longer apply
• When the employee ceases their employment
• 15 years after the rights were acquired
• When (in the case of rights that have been exercised) there is no real risk under the ESS of forfeiture or loss of the underlying shares and any genuine restrictions preventing the disposal of the shares no longer apply

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Special 30-day rule

• If the employee disposes of an ESS interest within 30 days of the ESS deferred taxing point, the ESS deferred taxing point is the date of disposal

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Assessable amount

• Employee includes in assessable income the market value of the ESS interest at the ESS deferred taxing point, reduced by its cost base
• Discounts attributable to employment outside Australia are foreign source income

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Future tax treatment of ESS interests

• An ESS interest is taken to have been acquired for its market value immediately after the ESS deferred taxing point
• However, if the ESS deferred taxing point occurs on the disposal of the interest, it is taken to have been acquired at that time

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Roll-over for corporate restructures

• ESS deferred taxing point may be triggered by takeover or restructure of employer (eg because of disposal of shares or breaking of the employment relationship)
• Employees can 'roll over' their ESS deferred taxing point if:
• An arrangement results in the company becoming the subsidiary of another company, or
• A change in ownership of the company results in ESS interests being replaced by ESS interests in another company
• The effect of the roll-over is that the employee’s new interests are treated as continuations of the old interests

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Relief against forfeiture

• Div 83A is generally taken never to have applied to an ESS interest where an employee has been assessed on a discount in respect of the ESS interest, but the ESS interest is subsequently forfeited or lost
• The effect of this rule is that the employee will be refunded the tax that they have paid on the discount
• However, the rule only applies if the forfeiture did not result from a choice made by the employee (other than a choice to cease employment, or, in the case of a right, a choice not to exercise the right before it lapsed or a choice to allow the right to be cancelled).

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